Beware the legal intricacies of BTL

The rules and the reality around financing

BTL properties can be complex and unexpected. Consequently, buyers should never make assumptions—even when a building seems a safe bet

Investing in BTL properties can be lucrative for landlords and investors alike, but it comes with various legal complexities that need careful navigation. Dealing with specialist finance for holiday and short-term lets, HMOs and MUFBs, as well as working with borrowers with adverse credit, expats and foreign nationals give rise to various legal intricacies of which brokers and landlords need to be aware if the transaction process is to be smooth and successful. Local rules on short lets

When considering holiday or shortterm lets, landlords should be mindful that individual local authorities may have their own regulations governing these property uses. Some councils may require a licence, for example, while others may have a limit on the number of days the property can be let.

Landlords need to know about these before purchase and applying for BTL finance so they can undertake research into the specific local authority regulations. Such upfront knowledge will assist them and their lawyers to comply with a specialist lender’s offer conditions so they will not be surprised by any additional costs further down the line.

The government is consulting over short-term lets and permitted development rights to address concerns in certain locations about the increase in the number of these properties. Any landlord with a portfolio of short-term or holiday lets will need to keep a close eye on the outcome of the consultation, which is due to end in June this year.

In relation to HMOs, the main legal complexity that we uncover in the due diligence process is where properties are in an area where article 4 directions are in force. This is where permitted development rights have been removed so planning permission is required for valid use as a HMO—however, in many cases, this has not been secured by the current owner. Investigating and rectifying this to ensure the property has a good and marketable title that is satisfactory to a BTL lender can cause delays and incur costs.

In certain circumstances, HMOs will be subject to licensing. This is separate from article 4 planning requirements, although they are often misunderstood as being one and the same in terms of requirements. An HMO licence does not automatically mean that a property has planning permission for this use.

When purchasing a HMO—before applying for finance—an investor should check whether the property is in an article 4 area, whether planning permission has been obtained for HMO use and, separately, whether the dwelling is appropriately licensed.

While licences are not transferrable between owners, landlords should check that the property has been properly licensed before they apply for their own, as this can help to gauge the likelihood of the property being up to the standard required for one.

In addition to planning and licensing rules, HMOs are subject to other requirements such as fire risk assessments, because there are shared areas within the property. This fire safety task should be undertaken annually and will need to be evidenced in a report. During the transaction process, it is fairly common to see that a fire risk assessment is not available or not in date, which causes unnecessary slowdowns as this has to be undertaken satisfactorily prior to the drawdown of the lender’s funds.

Additionally, for tenanted properties, it is essential to have clear, comprehensive documentation, including signed and dated tenancy or lease agreements, EPCs, tenancy deposit documents, electrical certificates (renewed every five years) and gas safety certificates (renewed every year). Having these available at the outset of the due diligence process assists with timescales and identifies any issues or gaps in documentation early on in purchase or refinance activity.

BTL Insider Magazine covered the abolition of section 21 notices in its debut Spring issue. This makes it more important for landlords to understand eviction processes as set out in section

8 of the Housing Act 1988. Evidence for the reason to evict is required, and this should be kept and compiled should it ever be needed. Good property management and administration is going to be even more important moving forward.

Individual and company borrowers

Some borrowers struggle with the volume of documentation involved when dealing with a specialist mortgage— both at application stage and during the legal process. A lender’s BTL security documents for an individual should usually consist of just a mortgage offer/ facility letter and a mortgage deed (also known as a legal charge), possibly with some ancillary declarations.

For a company borrower, other documents need to be considered and executed in addition to these, such as board minutes and personal guarantees. Each lender has different requirements with regard to these, but the majority of them require the individual providing the personal guarantee (usually the director or shareholder) to obtain independent legal advice on its contents. It is worth being aware of this at the outset so that a separate, independent solicitor—one not instructed by the limited company—can be lined up, ready to give this advice when the time comes. This prevents delays in returning the lender’s signed security documents, which are required prior to request of funds.

Obtaining BTL finance for borrowers who are expats, foreign nationals or have adverse credit can pose legal challenges. Lenders may have stricter lending criteria for these types of borrowers due to increased risk factors, and brokers need to be aware of these issues upfront to avoid lags and complications in the financing process.

Brokers should conduct a thorough assessment of the customer’s financial situation and credit history to identify any potential legal obstacles. They should also be well versed in the specific requirements for expats and foreign nationals, including visa status, residency permits and credit checks in home countries.

Brokers should also work with specialist lenders that have expertise in dealing with borrowers with adverse credit, expats or foreign nationals. These finance providers may have products and guidelines tailored to such customers and can therefore provide valuable advice and guidance throughout the financing process.

Crime and money laundering

Money laundering and criminal activities can pose a significant risk in BTL finance deals, particularly in cases involving expats, foreign nationals and borrowers with adverse credit. Brokers and landlords need to be vigilant and follow anti-money laundering regulations to prevent potential legal and financial repercussions.

It’s important for brokers, lenders and lawyers alike to be cautious about any red flags uncovered during the application, underwriting and legal due diligence processes, such as unusual transaction patterns, incomplete or inconsistent information, and suspicious behaviour. Many borrowers assume that, once identity and source of funds checks have been undertaken by the broker or finance provider, this would be sufficient to satisfy the extremely high bar that is imposed on the legal profession in this regard. This is not always the case. As the funds are passing through the solicitor’s client account, stringent and updated checks need to be undertaken. A customer can save time by being prepared with up-todate bank statements and a clear, current explanation of the source of wealth for any funds being put into a transaction.

At JMW, we deal with many lenders and brokers in the specialist finance space, and most on a repeat basis. It is always helpful when a good broker who understands the industry and the complexities and pressure that comes with it has advised the borrower at the outset with an outline of the process, the likely requirements of a specialist lender, and the legal due diligence procedure. This means borrowers are prepared and can front load as much information as possible.